Small Business Outlook 2015

Transcription

1 Small Business Outlook 2015

2 Small and medium sized enterprises (SMEs) are important to the UK economy. More and more SMEs are in fast-growing new work sectors such as Professional Services, Creative and Digital. The total number of SMEs in New Work sectors increased in the UK by 17% New Work SMEs support businesses and jobs in other sectors too These include bars, resturants, retail and other similar business activity in a city UK between This is made up of: These industries are more likely to be in cities 25% Creative 65% Creative 60% Digital 56% Professional 17% Professional because certain conditions support them to thrive: 12% Digital High skills International trade links Broadband infrastructure All cities should support the growth of New Work SMEs by supporting high skills, improving the city s broadband and supporting international trade links.

3 Contents 00 Executive Summary 5 01 The economic and policy context 9 02 Cities, Small Businesses and new work Data monitor: Small Business Performance 31 Acknowledgements The Centre for Cities would like to thank Zurich Insurance plc for their support of Small Business Outlook. All views expressed are those of Centre for Cities. This work contains statistical data from ONS which is Crown Copyright. The use of the ONS statistical data in this work does not imply the endorsement of the ONS in relation to the interpretation or analysis of the statistical data. This work uses research datasets which may not exactly reproduce National Statistics aggregates.

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5 Executive Summary

6 Small Business Outlook Executive Summary 6 For countries like the UK, changes in innovation and technology have increased the importance of particular industries and particular places. These changes have created thousands of new jobs and businesses, from developers and programmers in tech startups to designers and global branding companies. Small and medium-sized businesses (SMEs) in professional services, digital and the creative industries (referred to throughout as new work ) are becoming increasingly important both in terms of employment and output. Employment in these new work industries increased at over four times the average between 2009 and Output from the digital sector increased more than seven-fold (657 per cent) between 1990 and 2013 and by 286 per cent in the professional services and 196 per cent in the creative sector. These firms are overwhelmingly city-based, but they concentrate in some cities more than others. This year s Small Business Outlook looks at where in the UK new work SMEs are concentrated, how their performance varies and why. Mapping SMEs in these industries enables us to build a better understanding of how city economies vary across the UK and the conditions that new work sectors thrive in. The aim is not to encourage policymakers to try and replicate existing clusters, but to support them to take informed decisions to create, protect and foster conditions for growth that are relevant and appropriate for their place. New work SMEs are not randomly or evenly distributed. They are much more highly concentrated in some cities than others, as they benefit from access to wide pools of talent and specialised expertise and from being in close proximity to other highly innovative businesses. In Aberdeen, Reading and Cambridge more than one in two SMEs operate in the professional, digital or creative industries. This compares to just one in five in cities such as Burnley, Doncaster and Grimsby. New work SMEs create opportunities for firms operating in other industries. Cities that have a high proportion of SME employment in digital industries or professional services have also tended to see an increase in employment overall. This echoes Moretti s

7 findings in the US that for every job created in high tech industries, five jobs are created in other industries. Cities with high concentrations of these firms tend to be more productive and highly entrepreneurial with strong private job growth overall. The shift towards new work has created and reinforced the uneven economic geography in the UK, with SMEs in these highly innovative, productive sectors concentrating in cities predominantly in the South. Both government and cities prioritise new work industries in their economic strategies, but the geography of these industries is often ignored. National government needs to recognise the significance of place when making policy decisions, and cities themselves need to be realistic about the nature of their local business base and what they can do to support businesses to innovate. The map of new work SMEs provides an indication of the types of conditions these SMEs look for and thrive in. Cities with high concentrations of new work SMEs tend to be highly skilled, as well as digitally and globally connected. SMEs in these sectors also benefit from being in dense urban locations. The creative industries in particular concentrate in densely populated city centres. Cities with high concentrations of new work SMEs must ensure they are able to maintain and grow their highly innovative SME base by being open to new residents and businesses. This means providing new housing to keep pace with demand as well as managing some of the other consequences of growth such as rising congestion and a supply of appropriate and affordable office space. Other cities should not seek to be successful by replicating successful places such as Cambridge s Silicon Fen or London s Tech City ; successful clusters grow organically through the decisions of firms and individuals and the interactions between them. Instead cities should focus on the broader characteristics of these types of firms, what influences their location decisions and business interactions, and respond accordingly, adapting to the particular circumstances of their local economy. 7

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9 The economic and policy context

10 Small Business Outlook Small Business Outlook 2015: the economic and policy context 10 Introduction Fundamental shifts have taken place in the global economy over the last 30 years. Innovation and technology have created thousands of new jobs and businesses, from developers and programmers in tech startups to designers and global branding companies. As these types of jobs and companies, which are highly skilled and knowledge-intensive, continue to drive growth, the geography of the UK economy and its small and medium sized businesses (SMEs) base will continue to change. This year s Small Business Outlook looks at this shift towards new work and what it means for SMEs across the UK s 64 cities. It explores where new work SMEs are locating and why, and examines the wider impacts these firms have on their city economies. Crucially, it aims to build understanding of why SMEs in the professional services, creative and digital industries ( new work sectors) locate in particular places, and what this means for cities seeking to transform themselves into hubs for innovative, thriving small businesses. The shift towards new work Over the past few decades, there has been a notable shift in the UK economy towards the most innovative, knowledge-intensive industries.knowledge-intensive services 1 now make up 34 per cent of UK output and 29 per cent of total employment. 2 Within these sectors, growth has been particularly significant among the professional services, creative and digital sectors. Between 2009 and 2013, employment in these new work industries increased at over four times the economy as a whole. Over the last four years employment in creative firms grew by 4.9 per cent, in digital firms by 3.2 per cent and in professional services firms by 12 per cent compared with overall growth of 2 per cent. Between 2009 and 2013, output from the new work sectors increased by one and a half times the rate of the economy as a whole. 3 Output from the digital sector increased more than seven-fold (657 per cent) between 1990 and 2013 and by 286 per cent in the professional services and 196 per cent in the creative sector. Growth 1. Knowledge-intensive services include transport, publishing and broadcasting activities, telecommunications, IT and information services, finance and insurance, professional services (including legal and accounting activities, head office activities, management consultancy, architectural activities, advertising and market research), and cultural and creative activities. 2. BIS (2015) Growth Dashboard 3. Source: Gross Value Added at current basic prices by industry, United Kingdom National Accounts, ONS 2015

11 Figure 1: Output by broad sector ( m) GVA ( m) 1,600,000 1,400,000 1,200,000 1,000, , , , , Total Business & other services Public admin, health, education Trade, accomm. & transport Manufacturing Construction Primary sector & utilities Source: UKCES, Working Futures across most manufacturing sectors - with the exception of pharmaceutical and aerospace - has been more subdued, increasing by over 39 per cent between 1990 and Using broader industry definitions, new work industries make up over half (51 per cent) of the country s exported services by value. 5 forecast where future growth will come from, longer term economic trends suggest that knowledge-intensive services are likely to see the strongest output and employment growth in the medium to longer term (Figure 1). 6 The shift towards high skill, white collar jobs, including managers and professionals, is also predicted to be ongoing. The shift in the UK economy towards new work is set to continue. While it is notoriously difficult to precisely 4. Between 1990 and 2013, output from the pharmaceuticals sector increased by 175 per cent and by 79.6 per cent in aerospace between 1997 and Source: National Accounts, ONS, 2015; Industry of Production, ONS, ONS 2015, Traded Services; Sections J Information and communication, M professional, scientific & technical activities, R&S Arts, entertainment & recreation & other service activities made up 51 per cent of exported services in UKCES (2014) Working Futures

12 Small Business Outlook 12 Figure 2: Change in SMEs by sector (UK), % change by sector, Creative industries Professional services Financial Digital Total Manufacturing Primary industries SMEs SME employment Source: Business Structure Database, Note: excludes business and employment growth where size has exceeded the 249 employees maximum. Primary industries include agriculture, mining and quarrying. Other services Construction the rate of large businesses (25 per cent compared to 12 per cent). 7 The latest data indicates that SMEs are now at least as productive as large businesses. 8 The shifting profile of SMEs The shift towards new work in the UK economy is reflected in the changing profile of SMEs. Among the UK SME base, there has been a shift away from the primary industries, manufacturing, construction and lower value services, towards knowledgeintensive services, including creative industries, professional services and digital. More than a third (34 per cent) of SMEs now operate in new work industries; an increase from 31 per cent in 2008 (Figure 2). SMEs and economic growth SMEs, particularly those in the most innovative sectors, are important drivers of employment. Between 2011 and 2014, 29 per cent of SMEs expanded the size of their workforce; this is an increase from 26 per cent between 2008 and The average number of jobs created by individual SMEs also increased from 4.9 between 2008 and 2011 to 5.4 between 2011 and SMEs are also an increasingly important driver of output growth. Between 2009 and 2013, Gross Value Added (GVA) grew at twice New work SMEs in the creative industries, professional services and digital sectors saw the largest increases in employment between 2008 and Changes in SME employment follow a slightly different pattern across other industries, however: 7. Source: Annual Business Survey, 2015 and Interdepartmental Business Register, BIS are currently investigating the comparability between the ABS and employment data sources (IDBR and BRES). The latest data suggests, however, that GVA per worker increased by 21 per cent among SMEs compared to 11 per cent among large businesses between 2010 and GVA per worker in SMEs was 47,700 in 2013 compared to 47,100 in large businesses. SMEs in the digital economy and professional services are among the most productive: GVA per worker was 79,200 and 68,700 respectively in Source: Annual Business Survey, 2015 and Interdepartmental Business Register, 2015.

13 In financial services there has been a growth in the number of SMEs (14 per cent increase) but they have remained small, with employment only increasing by 2.3 per cent. In manufacturing, there has been a small increase in the number of SMEs but SME employment in manufacturing has fallen. In construction, both the number of SMEs and SME employment fell between 2008 and Policy and the economic importance of new work sectors The Government and cities recognise the economic importance of these new work sectors. The Coalition Government identified 11 key sectors as part of its Industrial Strategy that will benefit from long-term strategic partnership and where this can make the most difference to the economy. Among them, professional services and digital are highlighted as two sectors that have exhibited strong economic growth and where there is the potential to exploit growing domestic and global demand. The Department for Business, Innovation and Skills (BIS) continues to monitor the performance of the 11 sectors as part of its Growth Dashboard. More recently, the Government has re-prioritised policies on the basis of their potential to boost productivity growth. Policies are set out within a framework built around two pillars: 1) encouraging long-term investment and 2) promoting a dynamic economy that encourages innovation and efficient resource allocation. At the local level, nearly every city and Local Enterprise Partnership (LEP) economic strategy highlights the new work industries or at least one sub sector as being a source of comparative advantage within their local economy. For example, our previous research has found that 70 per cent of English cities identified the creative industries as one of their priority sectors. 9 Put simply, not every city can have a world leading cluster in the same few industries. Box 1: Defining new work SMEs Creative industries includes the publishing, production and broadcasting of literature and media services such as design, PR and advertising agencies, library and museum activities, artistic education and creation. Digital includes software and computer consultancy, programming and the reproduction of sound, video and information technology media. Certain news media activities and the manufacturing and wholesale of computer related equipment. Professional services include legal, accounting, administrative and management consultancy work, as well as scientific research and development and other professional activities. Full definitions are available online: Centre for Cities (2010) Firm Intentions: Firm Intentions: Cities, Private Sector Jobs & the Coalition

14 Small Business Outlook 14 The significance of place While the focus on new work sectors is welcome, there are two significant barriers to making the most of the growth in new work SMEs. First, national government policy often underplays the significance of place as a factor in driving growth in these industries. Second, cities can overplay the existing economic importance of certain sectors, including new work sectors, within their local economies. Cities are likely to play an ever more important role as the economy continues to shift towards new work. Businesses in these sectors tend to concentrate in cities: in 2014, 58 per cent of new work SMEs were located in one of the 64 largest urban areas in the UK. Box 2: The use of Primary Urban Areas The analysis undertaken in Small Business Outlook compares cities Primary Urban Areas (PUAs) a measure of the built-up areas of a city, rather than individual local authority districts. A PUA is the city-level definition used in the Department for Communities and Local Government s State of the Cities Report. It is useful as a consistent measure to compare cities across the country and we have used it since the first edition of Cities Outlook in It is worth noting that, as is the case with almost every definition of geographic units, PUAs are imperfect and fit some areas better than others. Hull and Cambridge PUAs, for example, are slightly under-bounded. Some cities with substantial populations, such as Colchester, But there is also huge variation between cities, with higher concentrations of new work SMEs in some compared to others. This report aims to build greater understanding of the geography of new work, the connections between SMEs operating in these industries and the wider economy of cities, and what this means for policy by exploring the conditions that these industries need to thrive. The focus on particular sectors is not intended to encourage cities to seek to replicate clusters or to pick winners. Instead the aim is to further the evidence base in order to support policymakers to take informed decisions to create, protect and foster conditions for growth in different cities. never made it into the PUA definition. And Manchester PUA is smaller than Greater Manchester, which also includes Rochdale, Bolton and Wigan PUAs. PUA data only exists for English cities; for Welsh and Scottish cities we have used local authority data with the exception of tightly-bounded Glasgow, where we have defined the city as an aggregate of five Local Authorities: Glasgow City, West Dunbartonshire, East Dunbartonshire, East Renfrewshire and Renfrewshire. Belfast is defined as the aggregate of Belfast City, Carrickfergus, Castlereagh, Lisburn, Newtownabbey and North Down. Note: The definition of Birkenhead throughout this report is Wirral Local Authority only. The 2009 reorganisation of local government combined Ellesmere Port & Neston with three other local authorities into Cheshire West and Chester, and many of the statistics used here are now reported for Cheshire West and Chester only.

15 Box 3: Self-employment Businesses with no employees (or sole traders) will only feature in our statistics if they are registered for VAT. Businesses with no employees accounted for 76 per cent (3.97 million) of all private sector businesses, 17 per cent of private sector employment and 7 per cent of private sector turnover at the start of An estimated 70 per cent of these sole traders (2.76 million) were unregistered at the start of These figures are only estimations, however, as the relevant surveys record self-employment in different ways. The Labour Force Survey (LFS) and Censuses record all self-employment and do not delineate between registered and nonregistered businesses, while the Inter-Departmental Business Register (IDBR) (the basis for the Business Structure Database) does not capture any unregistered businesses with no employees. 15 New work SMEs are more likely to be operating as sole traders: 16 per cent of workers in professional services and 13 per cent in digital are self-employed or freelance (with no employees) compared to a 10 per cent average. 11 For the reasons outlined above, however, it is not possible to identify which of these will be registered and included in the IDBR. As a result of the incompatibility of different datasets, unregistered sole traders are excluded from the analysis. 10. Source: BIS business population estimates, Source: Census 2011 Microdata, UK Data Archive, 2015

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17 Cities, small businesses and new work

18 Small Business Outlook Cities, small businesses and new work 18 Where are new work SMEs most likely to locate? New work SMEs tend to locate in cities. Nearly 60 per cent of these SMEs are based in cities and on average, 40 per cent of SMEs in cities are new work SMEs compared to 34 per cent in non-urban locations. Yet there is substantial variation between cities (Figure 3). Aberdeen, Reading, Cambridge, London and Oxford have the highest average concentrations of new work SMEs. In these five cities, around half of SMEs are in either the professional, digital or creative industries. This compares to just one in five in cities such as Burnley, Doncaster and Grimsby. There are more new work SMEs in the UK s largest cities, although this is to be expected given there are more SMEs overall (Figure 4). London accounts for 20 per cent of all SMEs but 29 per cent of those in new work sectors. New work SMEs are, however, under-represented in some of the UK s largest cities outside the capital. Just four of the 10 Core Cities Bristol, Cardiff, Leeds and Manchester have a higher concentration of SMEs in these sectors than the national average. While Birmingham has a high number of new work SMEs per cent of all new work SMEs in the UK, the second highest share of any city outside London - it does well only because it has so many SMEs. If you look at the proportion of SMEs in new work sectors in Birmingham, it is only 30 per cent, compared to an average of 34 per cent nationally. Sheffield has one of the lowest concentrations with just 29 per cent of its SMEs in these highly innovative, highly productive sectors. New work SMEs tend to be more heavily concentrated in cities in the South, with the exceptions being Aberdeen, Edinburgh and Warrington. Coastal towns and cities outside the Greater South East tend to have fewer new work SMEs relative to their total SME base. Brighton is the exception where 46 per cent of SMEs are new work SMEs.

19 Figure 3: Proportion of new work SMEs, 2014 Aberdeen Proportion of new work SMEs, 2014 (%) Dundee Glasgow Edinburgh Belfast Newcastle Sunderland Middlesbrough 19 Swansea Bradford Blackburn York Blackpool Burnley Leeds Hull Preston Rochdale Wakefield Bolton Doncaster Grimsby Wigan Barnsley Liverpool Sheffield Birkenhead Warrington Huddersfield Manchester Mansfield Stoke Nottingham Derby Newport Cardiff Telford Birmingham Gloucester Bristol Coventry Leicester Milton Keynes Oxford Swindon Reading Aldershot Northampton Peterborough Luton London Crawley Cambridge Southend Chatham Norwich Ipswich Bournemouth Southampton Portsmouth Brighton Worthing Hastings Plymouth Source: Business Structure Database, 2015

20 Small Business Outlook Figure 4: Concentration and change in number of new work SMEs (relative to national average), 2014 and Below average % of new work SMEs and above average growth in new work SMEs Middlesbrough Above average % of new work SMEs and growth in new work SMEs Aberdeen 2.5 Luton Dundee Gloucester 2 Edinburgh London Chatham Newcastle York Milton Keynes Huddersfield Glasgow 1.5 Leeds Coventry Brighton Leicester Liverpool Northampton Crawley Oxford Reading 20 Birkenhead Plymouth Bradford Southend Manchester Worthing Bristol Hastings Cardiff Wigan % of new work SMEs (indexed to UK average), 2014 Mansfield Norwich Swindon 0.6 Wakefield Blackburn Sheffield Warrington Derby Newport Rochdale Cambridge Burnley Sunderland Portsmouth Aldershot Nottingham Bournemouth Doncaster Barnsley Birmingham 0.5 Stoke Telford Peterborough Grimsby Hull Ipswich Swansea Preston Bolton Southampton 0 Bubble size = Share of national SMEs in the new work sectors, 2014 Blackpool Below average % of new work SMEs and growth in new work SMEs -0.5 % change in new work SMEs (indexed to UK average), Above average % of new work SMEs and below average growth in new work SMEs Source: Business Structure Database, 2015 SMEs in each of the individual new work sectors tend to follow similar geographies. For example, breaking the new work industries down into the three sub sectors (professional services, creative and digital sectors), eight cities rank in the top 20 with the highest concentration of SMEs across all three sub-sectors. In total, 17 cities were in the top 20 for at least two sub sectors. While following a broadly similar geographic pattern, the creative industries are slightly more dispersed compared to digital and professional services. Belfast, Sheffield and Hastings, for example cities with relatively low concentrations of new work SMEs overall rank in the top 20 cities with the highest concentrations of SMEs in the creative industries (see the Data Monitor chapter for further detail).

21 The geography of new work SMEs in the UK is selfreinforcing. Cities with the highest proportion of new work SMEs in 2008 continued to have the highest proportion in 2014, and cities which have seen an increase in one new work sector tend to have seen an increase in other new work sectors. For example, cities that have seen large increases in SMEs in either the digital or creative industries tend to have also seen large increases in SMEs in professional services. This implies two things: firstly that SMEs in these industries benefit from similar economic conditions, and secondly that they benefit from being in close proximity to firms in related industries (Box 4). New work SMEs benefit from proximity to other firms through shared inputs and infrastructure, labour pooling, and most importantly the exchange and diffusion of ideas driven by face-to-face interaction. The density offered by urban environments facilitates these spillovers by easing the flow of information, which supports innovation and boosts productivity. Workers in new work sectors are more likely to move locally from firm to firm, share knowledge about products and create connections between firms. 12 Proximity to clients is particularly important to businesses in these sectors as they provide highly specialised products and services which require a lot of client interaction to develop. The gap between cities is also widening. Cities such as Aberdeen and Reading, with high proportions of new work SMEs in 2008, have seen among the highest growth rates of SMEs in these industries. On the other hand, cities with smaller proportions of new work SMEs, such as Bolton and Preston, saw a far smaller increase in these SMEs, and Blackpool saw a fall. Box 4: Why do new work SMEs benefit from clustering together? There are two main types of spillovers that new work SMEs benefit from when locating in the same city as other new work SMEs. Intra-industry spillovers the view developed by Marshall 13 that the proximity of firms within a particular industry affects how well knowledge and ideas travel leading to higher levels of productivity and innovation within those industries. Companies operate more productively in sourcing inputs; accessing information, technology and institutions; coordinating with related companies; and measuring and motivating improvement. 14 This view emphasises the importance of specialisation. Inter-industry spillovers the view developed by Jacobs 15 that firms benefit from proximity to firms in different industries. Diversity within a city economy encourages spillovers between individuals and companies with different perspectives leading to higher levels of productivity and innovation. SMEs also benefit from improved access to a labour pool with transferable skills. The potential for these spillovers increase with the size and diversity of a city s economy Eriksson, R and Lindgren, U (2009) Localized mobility clusters: impacts of labour market externalities on firm performance. Journal of Economic Geography, 9 (1): Marshall, A (1890), Principles of Economics, London: Macmillan 14. Porter, M (1998) Clusters and the new economics of competition, Harvard Business Review 15. Jacobs, J (1969) The Economy of Cities, New York: Random House

22 Small Business Outlook 22 There are some exceptions, however, most notably in successful cities such as Cambridge, Aldershot, Warrington and Swindon (Figure 4). Despite above average proportions of new work SMEs, these cities have not seen growth in these sectors since the recession. This could imply broader infrastructure constraints on growth in these cities, for example a lack of affordable housing, although this has not seemed to hamper Aberdeen, Oxford or Reading in the same way. These are issues that these cities may wish to investigate in more detail. How does the performance of new work SMEs vary between cities? New work SMEs are more likely to be growing (and taking on new employees) in cities with high concentrations of these firms. In Aberdeen, for example, the city with the highest concentration of new work SMEs, there were more than two expanding new work SMEs for every one that was contracting (2:1) between 2011 and Of the 64 largest UK cities, average employment created by expanding new work SMEs was also highest in Aberdeen. In Blackpool and Grimsby by contrast, where there are far fewer new work SMEs as a proportion of the cities total SME base, the ratio of expanding to contracting new work SMEs was close to 1:1. And Belfast was the only city where more new work SMEs contracted than expanded. Leeds was one of the strongest performers among the big cities in terms of the average number of jobs created by expanding new work SMEs between 2011 and 2014, with an average of nine jobs created. In London, expanding new work SMEs increased their workforce by an average of seven employees. Given the scale of the capital, this means that one in three jobs created by existing new work SMEs in the UK between 2011 and 2014 were in London. By contrast, Birmingham was one of the weakest performers with expanding new work SMEs creating an average of five jobs between 2011 and 2014.

23 Do new work SMEs have an impact on the wider city economy? Cities which have seen an increase in the number of new work SMEs tend to have seen an increase in SMEs in other service industries. Five of the cities ranking in the top 10 for the highest increases in new work SMEs also rank in the top 10 for the highest growth in other services, while four of the 10 weakest performers were in the bottom 10 for both categories (Figure 5). Cities that have a high proportion of SME employment in digital industries or professional services tend to also have seen an increase in employment overall. This relationship is negative for cities with a high proportion of employment in construction, manufacturing and lower value services. Cities growth is now based on their ability to create conditions that encourage knowledge to be created and shared. The importance of a wide base of SMEs has been highlighted as a critical factor in this process, reflecting the fact that knowledge-intensive economies benefit from relationships between firms of related but varied industries that look to reinvent and innovate. 16 Figure 5: Change in the new work SMEs and other services 15 SMEs by city, % change in numberof SMEs in other services, % change in number of new work SMEs, Source: Business Structure Database, Other services include accommodation and food service activities, retail and real estate. 16. Glaeser E et al (2012) Entrepreneurship and Urban Growth: An Empirical Assessment with historical mines, NBER Working Paper No

24 Small Business Outlook 24 Figure 6: Relationship between performance of SMEs in different sectors Professional Digital Construction Creative Manufacturing Cities which have strengths in these sectors not only benefit from the growth of these industries, but from improved productivity in other firms in other words, having a successful neighbour increases a business s productivity regardless of their industry. 17 Moretti found that for every job created in US high tech industries, five jobs are created in other industries (two professional jobs and three in non-professional occupations). 18 This is much higher than the manufacturing sector where the multiplier is estimated to be 1.6. Lee also finds that an increase in firms in the creative industries boosts wages in other industries in UK urban areas, Other services Advanced manufacturing Source: Business Structure Database, Thickness of line indicates strength of correlation. Other KIBS Financial Primary industries although he finds less employment impacts. 19 These findings are further corroborated by the links between the performance of individual SMEs in different industries (Figure 6). The performance of individual SMEs is closely linked with their proximity to other SMEs in related industries. Cities which have a high proportion of SMEs that are expanding in the digital and creative industries tend to have more SMEs expanding in professional services, for example. These inter-industry spillovers also operate over the wider city economy. SMEs in other industries, such as financial services, other services and construction, also benefit from their proximity to these successful SMEs. Cities which have higher rates of expanding firms in the new work industries tend to have higher rates of growing firms overall. Cities with a high proportion of new work SMEs tend to be more productive and highly innovative, as measured by GVA per worker and patents respectively (Table 1). They also tend to have high earnings, low unemployment and a high business density. These relationships are negative for cities with a high proportion of SMEs and employment in SMEs operating in the advanced manufacturing, other manufacturing, construction and lower value services. Cities with high concentrations of new work SMEs are more likely to have performed well over the longer term. Five of the top 10 cities with the highest proportion of new work SMEs are in the top 10 for overall jobs growth in the last 10 years. Cities which have seen an increase in the number of new work SMEs also saw high and increasing productivity and earnings over the same period. 17. Shutters et al. (2015) Constrained pathways to a creative urban economy, Martin Prosperity Institute research paper 18. Tech City (2015) Tech Nation; TheCityUK (2014) Driving Economic growth creating sustainable jobs 19. Lee, N (2014) The creative industries and urban economic growth in the UK. Environment and Planning A

25 Table 1: Relative economic performance of cities with high concentrations of new work SMEs More productive More innovative (patents) Larger private sector growth Higher business density Lower unemployment Higher earnings Digital Creative Professional services Source: Business Structure Database, 2015; Centre for Cities, 2015 Table 2: Characteristics of cities with high concentrations of SMEs in new work industries Highly skilled labour force Digitally connected Global in outlook Dense urban centres Digital Creative Professional services 25 Source: Business Structure Database, 2015; Centre for Cities, 2015 Why are some cities more attractive to new work SMEs than others? A skilled labour pool, critical mass of related firms and the proximity to networks of clients and competitors were found to be key factors in recent studies evaluating the location decisions for new work industry start-ups 20 and clusters. 21 Further work by City Initiatives for Technology, Innovation and Entrepreneurship (CITIE) assessed cities based on how they supported innovation and entrepreneurship. 22 There were three key elements: the openness of the city to new ideas and new businesses; whether a city s infrastructure is optimised for high-growth businesses; and whether the city builds innovation into its own activities. Our research also shows that cities with a concentration in each of the new work industries tended to share many of the same characteristics (Table 2). 20. Compass Techcrunch (2015) Global Startup Ecosystem Ranking 21. NESTA (2010) Creative Clusters and Innovation 22. CITIE (2015) 2015 CITIE results

26 Small Business Outlook 26 Highly skilled and innovative Cities which have a concentration of new work SMEs tend to have stronger skills profiles, with more graduates and fewer residents with no qualifications. For example Reading has the second highest proportion of new work SMEs (53 per cent) and the seventh highest proportion of graduate residents (43 per cent), whereas Stoke has the fifth smallest share of new work SMEs and the fourth highest proportion of residents with no formal qualifications. For cities like Reading this is something of a virtuous cycle, businesses in new work sectors locate where there are large pools of talent to hire from, then these businesses attract further graduates to the city. Firms in digital and financial industries, for example, reported that their location decisions were primarily based on the availability of skilled staff. 23 Highly skilled workers are attracted not only to job opportunities on offer, but the career ladders available by having a thick market of related firms. 24 Similarly, cities with a higher proportion of new work SMEs such as creative firms are also likely to have high-quality universities. 25 This might be influenced by London s large higher education and creative sectors, but is also reflected in a tendency of SMEs in these industries to work closely with universities. 26 Global in outlook New work SMEs are more likely to operate in international markets, rather than rely on local markets. For example, 32 per cent of SMEs in Cambridge trade internationally and 51 per cent of SMEs in the city are in new work sectors, whereas 54 per cent of SMEs in Grimsby rely on local markets and only 22 per cent of SMEs in the city are in the new work sectors. SMEs that trade internationally tend to increase their productivity and the productivity of a city. 27 This is evident in the relationships at city level between concentrations of new work SMEs, international trade and productivity. Such SMEs not only benefit from broader market opportunities, they are also more likely to pursue other growth-related strategies, investing in innovation and workforce development for example. 28 Cities connectivity is due to functional linkages of firms rather than geography alone, therefore the 23. Tech City, 2015 Tech Nation. TheCityUK 2014, Driving Economic growth creating sustainable jobs. 24. Champion T, Coombes M & Gordon I, (2013) How Far Do England s Second-Order Cities Emulate London as Human-Capital Escalators? SERC Discussion Paper As measured by universities with a high REF rating within a 45 minute drive of the city centre. Source: Research Excellence Framework, Virani, T (2014) Mechanisms of collaboration between creative small, medium and micro-sized enterprises and higher education institutions: reflections on the Creativeworks London Creative Voucher Scheme 27. National Bureau of Economic Research (2015) Comparative advantage of cities 28. Centre for Cities (2014) Small Business Outlook 2014

27 industries and practices of a city s firms is crucial to their global outlook. 29 Digitally connected Cities with a high proportion of SMEs in the digital sector tend to have wide coverage of superfast broadband. For example, 86 per cent of postcodes in Brighton have access to Super-Fast Broadband and 12 per cent of SMEs are in the digital sector whereas just 57 per cent of postcodes in Barnsley have this digital connectivity and just 5.1 per cent of SMEs are in the digital sectors. The digital sector is the only sector in which there is a clear relationship and reflects the importance of this infrastructure to these businesses. Tech City UK s recent survey of digital firms also found that digital firms consider access to broadband as a key factor for location decisions. 30 The What Works Centre for Local Economic Growth reviewed the impact of broadband investment 31 and found the impacts on productivity and employment can be positive for SMEs especially in cities and for specific industries, including the digital sector. City centres accommodating of sole traders and small businesses Our research finds that new work SMEs, and particularly creative industries, tend to be in cities with relatively more jobs in the city centre (as opposed to other areas of the city). This may be linked to the location preferences identified for the creative industries 32 or possibly the impact the sector has on the attractiveness of city centre locations to other businesses. This would suggest that strong city centres are important firstly to encourage ideas exchange and secondly for a city economy to benefit from the spillovers that result from this activity. 33 Tech City s survey found that firms in six digital clusters identified access to social networks as the key bexnefit of their location. Our research shows that four of these six cities have concentrations of digital firms in the top 10, suggesting that network benefits are greatest where there is a higher density of firms in these new work industries. Many businesses operating in the creative and digital industries are sole traders or employ a small number of staff. Qualitative research for this paper revealed that new work SMEs often prefer smaller, more flexible premises, which may be more prevalent in city centres. 34 Increasingly flexible work places such as Duke Studios in Leeds or the Engine Shed in Bristol are allowing for co-location, lower overheads and the capacity for businesses to grow quickly Brookings Institute (2013) The 10 Traits of Globally Fluent Metro Areas 30. Tech City UK (2015) Powering the Digital Economy 31. What Works Centre (2015) Broadband Evidence Survey 32. Liu (2015) Creative Industries and Urban Spatial Structure. 33. Manhattan s advertising industry the greatest benefits for firms was when proximity was less than 750 metres, while other research finds that these agglomeration effects are strongest over distances of less than one mile. 34. Interviews

28 Small Business Outlook 28 Policy implications Shifts in the nature of the UK and global economy over the last three decades, which have been reinforced by the recession and through the recovery, have created an inherently uneven economic map with new work SMEs concentrating predominantly in cities in the South. Cities, with high concentrations of new work SMEs, must ensure that they are able to maintain and grow their highly innovative SME base by being open to new residents and businesses. This means providing new housing and services to keep pace with demand 35 as well as managing some of the other consequences of growth such as rising congestion. It also means ensuring that the supply of skills keeps pace with demand. The UK Commission for Employment and Skills (UKCES) identified for example that digital and creative firms have reported persistent skills shortages for highly qualified professional staff. 36 Cities with a lower concentration of new work SMEs should not seek to replicate Cambridge s Silicon Fen or London s Tech City. Successful clusters grow organically through the decisions of firms and individuals and the interactions between them rather than as a result of government policy interventions. 37 Similarly the role of the creative industries in regenerating city centres needs to be seen in the context of broader local conditions rather than publicly funded creative quarters. Cities should instead focus on the broader characteristics of these types of firms and what influences their location decisions and respond accordingly. As Glaeser puts it, most creative people like what most well-off people like namely affordable and good quality housing, schools and transport. 38 All cities should seek to support growth among SMEs in highly skilled, innovative sectors by ensuring that: SMEs are able to access skills and knowledge Cities can improve the skills levels of their labour force by better matching their skills provision with business needs. For example, Sheffield, Leeds and Manchester have used their city deals to develop tailored local skills policies to match the delivery of skills with local business demands in these core cities. 39 Cities can also encourage knowledge exchange between new work SMEs and universities by targeting specific barriers to collaborations between partners. 40 SMEs have access to high performing digital infrastructure Cities can lobby providers and attempt to encourage more competition between them by making them aware of the market opportunities. They can also work with businesses to encourage the uptake of broadband. DCMS SuperConnected Cities Programme provides vouchers to SMEs in partner cities to cover connection costs for superfast broadband, cities could usefully support this project by offering targeted business support. SMEs are supported to trade internationally National schemes such as the UK Trade and Investment s (UKTI) Centres of Excellence 41 for creative, digital and other industries aim to open these markets to UK businesses in specific cities with strengths in specific industries. Cities can work with UKTI where appropriate to maximize the impact of these interventions. It is also important for cities to emphasise and value diversity in the economy by supporting firms across different 35. Centre for Cities (2014) Delivering Change: Building homes where we need them. 36. UKCES (2012) Sector Skills Insights: Digital and Creative 37. LLAKES (2014) Research Paper 48: Rethinking industrial policy design in the UK. 38. Glaeser, E (2004) Review of Richard Florida s The Rise of the Creative Class 39. Centre for Cities (2015) City Deals and Skills 40. Centre for Cities (2014) Delivering Change: How Cities can support links between Universities and High Growth Firms 41. DCMS (2014) UK Creative Industries International Strategy

29 industries to trade and encouraging international inward investment, opening the city to more knowledge sources. Provide suitable premises for sole traders and expanding small businesses policymakers can respond to the needs of new work SMEs in the type of office space they plan for and provide. While many of the most successful examples of these incubators and hubs are cofounded or led by private sector industry leaders and entrepreneurs, 42 local authorities can support these with funding or softer measures through planning and sharing information. Central government should support cities to address the challenges faced by local SMEs by ensuring that meaningful deals are signed with the largest cities. Cities need more powers to be able to respond to the needs of SMEs. As this report has set out, different cities have very different industrial make ups and priorities. The UK is however highly centralised, therefore cities even those with relatively more powers such as London and Manchester are typically limited in their abilities to innovate, raise or spend funds in a tailored way to meet local conditions. This is now changing, and against the backdrop of the Northern Powerhouse and the city devolution deals some of the UK s largest cities are negotiating greater powers and responsibilities for economic development roles that affect their areas Centre for Cities, (2014) Supporting links between cities, universities and high-growth firms

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31 Data Monitor: Small Business Performance

32 Small Business Outlook Data Monitor: Small Business Performance Overview 32 There is significant variation in the performance of SMEs across UK cities. This matters because SMEs are critical generators of jobs and output, impacting on the performance of individual cities and the national economy as a whole. This section takes a detailed look at SME performance across UK cities: SME density 2. Business starts 3. SME expansion 4. High-growth firms 5. SME contraction 6. SME closures 7. 'New work' industries 43. All data, with the exception of business starts, refers to SMEs in the private sector only.

33 SME Density SME density (number of SMEs per 10,000 population) provides a useful indicator of a city s economic success. Cities with a high SME density are usually strong economic performers: out of the top 10 cities for SME density, seven had the highest rate of productivity (GVA per worker in 2013). SME density is increasing at a higher rate in cities than elsewhere: SME density increased by 9.5 per cent in cities between 2011 and 2014, compared to just 6 per cent nationally. Medium-sized cities in the South East tend to have the highest SME density: with the exception of London and Bristol, no large city ranked in the top 10 for SME density and seven of the top 10 cities are located in the South East. London had the highest SME density in 2014 with 437 SMEs per 10,000 residents. This is 33 per cent higher than the national average, and 2.8 times higher than Sunderland, the city with the lowest SME density. Aberdeen saw the highest increase in SME density between 2011 and 2014, followed by Northampton, London, Middlesbrough and Swindon. In addition to experiencing the greatest increases in density, Aberdeen and London ranked in the top 10 cities for SME density, both in 2011 and Only three cities Belfast, Mansfield and Blackpool experienced a decrease in SME density. While Mansfield also had one of the lowest concentrations of SMEs in 2011, Belfast and Blackpool had an average proportion of SMEs per 10,000 inhabitants (ranking 31st and 19th respectively). Variation by size Almost 90 per cent of city SMEs in 2014 were micro firms (0-9 employees), 8.9 per cent were small firms (10 to 49 employees) and 1.5 per cent were medium-sized (50 to 249 employees). Between 2011 and 2014 the number of small firms increased by 14.2 per cent, medium-sized firms by 12.2 per cent and the number of micro firms by 8 per cent. Southend had the highest proportion of micro firms (92 per cent), while Aberdeen had the highest proportion of medium-sized firms (2.9 per cent). 33